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Banks will be tested on their ability to withstand a severe recession - including a "sharp" slowdown in China - as part of a new round of "stress tests" to be completed next year, the Federal Reserve said yesterday.

The 19 biggest US lenders must outline dividend and repurchase plans with the central bank every year, and the Fed then publishes the results of a test that subjects the banks' loan and securities portfolios to various hypothetical economic conditions. About a dozen other large US lenders must test themselves and share their results with the Fed, but those aren't published.

The tests, mandated by the 2010 Dodd-Frank financial overhaul law, are more complicated than ones completed earlier this year. This time, the most dire of the three scenarios developed by the central bank calls for a peak level of unemployment at 12.1%, hitting in the second quarter of 2014. The current level is 7.9%.

Under the 2012 tests, made public in March, the Fed tested banks' stability if unemployment climbed to 13%, stock prices fell 50% and home prices fell by 21%.

This year's scenario envisions a "sharp slowdown in economic activity in China that has substantial spillovers to activity in the rest of developing Asia."

The Fed said the scenario is not an official forecast, but rather a "hypothetical scenario" designed to assess banks' ability to withstand an extremely harsh economic climate.

The central bank also published two other scenarios: a moderate recession starts at the end of this year and lasts until the start of 2014 and a "baseline" scenario, consistent with many economic forecasts where the U.S. economy grows about 2.75% per year and unemployment falls to nearly 6.8% by the end of 2015.

The annual stress tests started in 2009 as a way to convince investors that the largest banks could survive the financial crisis. They have since become annual events that determine banks' ability to pay dividends or buy back shares.

Earlier this month, the central bank made changes to the stress test process as part of an effort to reduce tensions with banks. firms whose dividend or share buyback proposals would cause them to fail the Fed's test will now be allowed to cut back those requests before the stress test results are published.

When the final results are published, it will be clear which banks took advantage of the one time revision option because the Fed will publish two sets of results for that bank - one with the original distribution request, and one with the lower request.

Banks must submit their capital plans and internal stress test results to the Fed by January 7. The central bank will release its results by next March 31.

Write to Alan Zibel at alan.zibel@dowjones.com and Victoria McGrane at victoria.mcgrane@wsj.com